Total Factor Productivity and Its Contribution to Malaysia\'s Economic Growth

Rahmah Ismail,Noorasiah Sulaiman,Idris Jajri

doi:10.19026/rjaset.7.891

Rahmah Ismail, Noorasiah Sulaiman + Show 1 more

Open Access

https://doi.org/10.19026/rjaset.7.891

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Abstract

This study examines Total Factor Productivity (TFP) growth of the Malaysian economy from 1971 to 2007. By using the method of Data Envelopment Analysis (DEA), this study estimates the contribution of technological change and technical efficiency change to the TFP growth and further identifies the determinants of TFP. The results from this study show that for the overall periods between the years 1971 and 2007, the contribution of technological change to TFP is higher than the contribution of technical efficiency change. Similar results are found for the periods 1971-1985 and 1999-2007. Only for the period 1986-1998, the contribution of technical efficiency change exceeds that of technological change. The study found that even though TFP growth is a significant contributor to the economic growth, but its contribution is still lower than the capital and labor. In contrast, capital is the most important contributor to the economic growth of Malaysia. Further, the result shows that the manufacturing output growth is the main contributor to the growth of TFP, followed by the percentage of foreign-owned companies. The percentage of workers with tertiary education is not a significant determinant of TFP growth despite having a positive and the highest coefficient.

Highlights

Total Factor Productivity (TFP) refers to total productivity of all input including physical inputs like capital and labor, input quality like technology and skills and management of inputs like total quality management and human resource management
Technological advancement is essentially a part of TFP growth since technology is an input in production process and TFP measures total productivity of inputs associated with the production process
Value of TFP: According to the Data Envelopment Analysis (DEA) approach and stochastic frontier, two important components contributing to the growth in TFP are technical efficiency change and technological change

Summary

Introduction

Total Factor Productivity (TFP) refers to total productivity of all input including physical inputs like capital and labor, input quality like technology and skills and management of inputs like total quality management and human resource management. TFP is often regarded to be relatively more important than the productivity of separate inputs like labor productivity and capital productivity since through this approach, the efficiency of inputs is measured in a composite manner and by taking into account their quality. In measuring the contribution of input to output, elements other than the quantity of input will be included when measuring TFP. TFP growth is closely associated with technological change and they are mutually affective. Technological advancement is essentially a part of TFP growth since technology is an input in production process and TFP measures total productivity of inputs associated with the production process. An improvement in the level of technology naturally leads to increase in TFP growth

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